| Non Farm Fridays |
 The Non Farm Payrolls (NFP) report is released the first Friday of each month under the Bureau of Labor Statistics Employment Situation data release. Forex traders have affectionately dubbed these release days as “Non Farm Fridays” due to the high volatility and sentiment impact of the data. Released with the NFP report is the headline Unemployment Rate, but the headline rate is of little value to traders. The headline Unemployment Rate is considered a lagging figure and does not represent the present employment situation accurately. Instead, Forex investors and traders focus on the raw data behind the NFP report to gauge present and future economic health. The NFP number itself is month to month (MoM), comparing jobs that were added or lost to the previous month. The NFP report analyzes employment changes in government, healthcare, mining, manufacturing, professional services, construction, retail and miscellaneous private sector services [1]. Farm payrolls are omitted due their seasonal nature. The NFP reports are closely examined by the Federal Open Market committee (FOMC), and therefore they deserve the same attention of Forex traders.Prior to the data release, teams of economists determine an estimation for the upcoming figure. Upon the release, the market will compare the estimated number to the data release. Large spikes in volatility are common, especially if the headline NFP number deviates greatly from the estimation. However, once the underlying details of the report are examined, those spikes have the potential for immediate reversal. This makes “trading the news release” a perilous task. For example, take the August 2010 NFP report released on 09/03/2010. The headline number came in at -54,000 jobs lost MoM[2]. Buried under the headline number was positive job creation in almost every subcategory. The reason for the negative number was the termination of 114,000 U.S. Census jobs, a number already factored in by the markets. In fact, the report states, “Total private employment trended up over the month (+67,000)” [3]. The result was risky assets such as U.S. Stocks, the Euro and the Australian Dollar experienced strong rallies despite a negative headline number. The correlation between the NFP report and the U.S. Dollar became inverted after the declaration of bankruptcy by Lehman Brothers and the subsequent credit defaults that ensued in September, 2008. Under “normal” circumstances, a better than expected NFP number indicated a strong economy, and thus a stronger U.S. Dollar. Once the vulnerability of the global banking system was exposed by the Lehman bankruptcy, an inversion of that correlation occurred. Frightened investors sold off riskier assets such as stock holdings, Euros, oil futures etc. and demanded U.S. Dollars. The reason is that holding “cash” is a better alternative than a depreciating asset. In the current economic climate, worse than expected NFP reports (or any U.S. economic report) are actually U.S. Dollar positive, and good employment numbers are U.S. Dollar negative. The Forex trader must understand this present inverse correlation, and that it will change as the greater economic picture changes. The current inverse relationship between the NFP report and the U.S. Dollar may seem counterintuitive. However, successful Forex trading requires both knowledge of important fundamental data, and an understanding of market reaction to those major market events. The monthly NFP report is a news release with a heavy Forex market impact, and it warrants careful attention from the Forex trader. Source: U.S. Department of Labor Statistics, http://www.bls.gov/news.release/empsit.nr0.htm, [1],[2]&[3]. |
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